FCC largely keeps phone rules intact

Baby Bells fail to win significant relief from regulations

WASHINGTON (CBS.MW) -- The Federal Communications Commission, in a sharply divided vote, declined on Thursday to grant major regulatory relief to the Baby Bell local phone carriers.

The FCC commissioners, voting 3-2 with Chairman Michael Powell dissenting, agreed to give the states an even stronger role in regulating the Bells.

Under current rules, the Bells have to let rivals use their local networks at sharp discounts. They also have to let rivals "share" portions of their local phone lines to deliver high-speed Internet service.

The FCC did rule that line-sharing will be phased out over three years, with the Bells allowed to raise prices "incrementally" each year on the portion of copper wire used to deliver high-speed Internet. It's a significant win for the Bells.

Yet the agency stopped well short of the more drastic changes the Bells wanted, though the effects of the ruling might not be known for months as companies search to exploit loopholes.

"It's a mixed decision," said Pat Brogan of The Precursor Group, a Washington consulting firm that tracks telecom regulation. "The FCC gave the Bells some concessions on broadband, but it gave them almost nothing" that will help them in the local-phone market.

For consumers, it's also a mixed bag. Local phone rates might remain flat or even decline slightly under a best-case scenario, but high-speed Internet prices for some customers could rise.

Failed bid

Powell had sought to allow the Bells to exempt portions of their networks from rivals or to charge higher prices. He argued that Bell rivals saw little incentive to build their own local networks -- without which Powell believes true competition is impossible.

His dissenting opinion was the first by an FCC chairman since 1991. Powell was joined by another Republican, Kathleen Abernathy.

Powell's deregulatory bid was parried by the panel's third Republican, Kevin Martin, who sided with the two Democrats in maintaining and even extending a strong role for state regulators.

The states will be granted more authority to determine which parts of a local network the Bells have to lease, for how long, and at what price.

The key role played by Martin in thwarting the chairman's efforts drew immediate howls of protest from Powell's allies in Congress.

"A palace coup led by Commissioner Kevin Martin has breathed new life into the dying era of big government control over U.S. telecommunications policy," decried Rep. Billy Tauzin, R-La. "Market forces once again have been shackled by political forces."

Throwing Bells a bone

The Bells, including giants Verizon
VZ, -0.14%
SBC
SBC, +0.65%
and Bell South
BLS, -1.69%
did win some outright concessions -- and perhaps some unintended ones.

The demise of line sharing might hurt Bell rivals such as Covad Communications, but it will protect the Bells' growing DSL, or digital subscriber line, business.

Rivals would still be able to lease access to an entire phone line, but at a costlier rate than just leasing the high-frequency portion used for DSL. The lower frequency on the copper wire carries voice calls.

Ironically, Powell fought to maintain line sharing, saying that it has had "clear and measurable benefits for consumers."

"The decision to kill off this element and replace it with a transition of higher and higher wholesale prices will lead quite quickly to higher retail prices for broadband consumers," Powell said.

The Bells also won't have to let rivals lease access to new fiber lines that they lay down to connect new housing developments or businesses.

Even that decision, however, is bound to cause confusion in cases in which portions of the Bells' networks are composed of both copper and fiber.

The FCC ruling appears to remove those portions from leasing requirements, potentially providing the Bells with an escape hatch. If they install some fiber assets in every major copper loop, they might be able to get those network assets exempted from regulation.

"I fear this decision may well result in higher prices for consumers and put us on the road to re-monopolization of the local broadband market," said FCC Commissioner Walter Copps, a Democrat.

The Bells also can seek to exempt "switches" from leasing requirements in cases in which they can prove "economic" hardship or operational difficulties. In addition, the Bells can appeal for relief in cases involving large business customers using super high-capacity, high-speed lines.

By contrast, Powell sought to phase out leasing requirements for switches -- crucial devices that direct traffic to their intended destination - entirely within a few years. Since switches are costly to deploy, Bell rivals fought to maintain wholesale access to them.

Little bang for buck

All together, the FCC order appears to represent a near-term setback for the Bells, which have lost 10 million lines -- half of those in the past year -- to rivals that lease access to their local networks under so-called UNE-P requirements.

UNE-P, which stands for unbundled network access elements platform, is an outgrowth of the far-reaching Telecommunications Act of 1996.

The act sought to bring competition to the local phone market. By opening their local networks to rivals, the Bells would be granted authority to sell long distance -- a market from which they have historically been barred.

Yet the long-distance market has not proven particularly lucrative, while the Bells have lost millions of highly profitable local lines. Sales and profits have since slumped and thousands of Bell workers have lost their jobs.

In light of those troubles, the Bells have put a full-court press on Congress, triggering a major lobbying war in which both sides have spent millions of dollars. They argue that plenty of competition already exists.

"Local competition now comes in the form not only of wireline service, but also from cell phones, the Internet, cable telephony and more," SBC President William Daley said after the FCC's ruling.

"Instead of acknowledging this new reality and freeing telecom companies to invest and bring new services to consumers, today's decision preserves the status quo of lost jobs, corporate subsidies, illegal rules and diminished investment," he said.

Courting trouble again?

The FCC was forced to revisit the issue after a federal court in Washington questioned the agency's rationale for existing UNE-P rules. The court has ruled twice against the FCC and gave it a Feb. 21 deadline to revise its rules.

Still, the agency's latest revision is also likely to undergo a court challenge, and Powell's dissenting opinion was crafted to sway the court when it makes its decision.

During the FCC meeting, he argued that a federal court might strike down the new rules.

"What is remarkable about today's decision is that one looks in vain to find a clear or coherent federal policy in the choices made by the majority," an exasperated Powell said.

Interestingly, this time it might be rivals of the Bells doing all the suing. They stand to lose big in the high-speed Internet market, and the Bells might find ways to stymie them in the local phone market as well.

Whatever the case, the local phone market appears unlikely to see full-scale competition anytime soon.

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